Sterling kept pace with the Dollar for most of the week, staying mainly within half a cent of its $2.03 opening level. On Thursday the wheels came off and Sterling headed lower. It was down to $2.00 by Monday morning and pointing South.
Just for a change the Dollar was not the victim of choice during the week. It did lose about a cent to the Euro but actually managed to head upwards against the Yen and, of course, Sterling. The US economic data were not much help to investors. As the week drew to a close there was a typically confusing set of data when Industrial Production and Retail Sales both came in softer than forecast while Consumer Confidence improved, against all expectations. The main focus of debate was this Tuesday’s meeting of the Federal Open Market Committee. Most analysts look for a cut of either a quarter or a half percentage point but it is within the bounds of possibility that Chairman Ben Bernanke will guide the committee away from any cut at all. Reportedly he is not convinced that the an official rate change would have any effect on unclogging the liquidity crisis in the interbank cash market.
On most fronts the British Pound wandered through the week with a post-it note on its back that read “kick me”. It drifted lower as economists and investors became steadily more convinced that any chance of higher base rates had gone out of the window as a result of the liquidity crunch. With three month money trading up to a full percentage point higher than Bank Rate the commercial banks have done their own tightening; there is no evidence to suggest that the screw needs to be turned further by the Old Lady. But that was nothing. On Thursday night it emerged that the Bank had stepped in to keep Northern Rock afloat with bucketfuls of liquidity. Investors were almost as alarmed as the depositors who spent the weekend queuing outside branches of Northern Rock in the hope of liberating their money. The weekend press went into bat on the subject with their usual vigour and any market participant who had not been boot-faced about Sterling on Friday was surely in no doubt by Monday morning.
So what to do?
The Dollar’s problems were put into the shadow by more immediate issues with the problems at Northern Rock. Sterling has forfeited its right to the territory above $2 and the outlook is uncertain.
The Dollar can still be expected to move lower in the longer run but buyers should once again consider hedging their positions by buying half of their requirement forward. A protective stop order is definitely worthwhile just in case other UK institutions come unglued.
Receive a Free Currency Consultation
Source:Moneycorp
